Unum Group 2016 Form 10-K Summary
Business context and reporting period
Unum Group provides workplace financial protection benefits in the United States and United Kingdom, including disability, life, accident, critical illness, dental, and vision products. Principal segments are Unum US, Unum UK, Colonial Life, Closed Block, and Corporate. The filing covers the fiscal year ended December 31, 2016, with comparisons to 2015 and 2014.
Premium income was generated primarily by Unum US, which represented 62.7% of consolidated premium income, followed by Colonial Life at 17.0%, Closed Block at 14.0%, and Unum UK at 6.3%.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Premium income | $8,357.7 million | $8,082.4 million | 3.4% |
| Total revenue | $11,046.5 million | $10,731.3 million | 2.9% |
| Net investment income | $2,459.0 million | $2,481.2 million | (0.9%) |
| Income before tax | $1,347.7 million | $1,238.3 million | 8.8% |
| Net income | $931.4 million | $867.1 million | 7.4% |
| Diluted EPS | $3.95 | $3.50 | 12.9% |
| After-tax operating income | $926.2 million | $901.0 million | 2.8% |
| Operating income | $1,339.8 million | $1,294.0 million | 3.5% |
| Operating cash flow | $1,116.1 million | $1,292.1 million | (13.6%) |
| Total assets | $61,941.5 million | $60,563.6 million | 2.3% |
| Long-term debt | $2,999.4 million | $2,449.4 million | 22.5% |
| Stockholders’ equity | $8,968.0 million | $8,663.9 million | 3.5% |
Net margin was approximately 8.4% of total revenue, while operating income was approximately 12.2% of operating revenue. The consolidated benefit ratio improved to 83.1% from 83.9% in 2015. The earned book yield declined to 5.30% from 5.40%, reflecting continued low interest rates.
Segment performance and material changes
- Unum US: Operating income increased 7.6% to $914.2 million. Premium income rose 5.7% to $5,240.9 million, and the benefit ratio improved to 69.2% from 70.1%. Group disability benefited from lower claim incidence and favorable recoveries, while investment income declined.
- Unum UK: Operating income declined 8.5% in reported dollars to $128.6 million, largely reflecting unfavorable foreign currency translation. In local currency, operating income increased 3.0%, premium income increased 3.6%, and sales increased 13.8%. The benefit ratio deteriorated to 69.4% from 68.5%.
- Colonial Life: Operating income increased 1.6% to $314.2 million. Premium income increased 5.9% and sales increased 10.3%; the benefit ratio rose modestly to 51.3% from 51.0%.
- Closed Block: Operating income increased 8.7% to $129.5 million. Premium income declined 3.1% as individual disability business ran off, while long-term care premium income increased through rate increases. Long-term care’s interest-adjusted loss ratio increased to 91.1% from 87.6%.
- Acquisition: In August 2016, Unum acquired Starmount, a U.S. dental and vision provider, for $140.3 million plus up to $10.0 million of contingent consideration. The acquisition added $111.2 million of goodwill and did not materially affect 2016 consolidated results.
- Reinsurance: Effective October 1, 2016, Unum ceded 30% of the risk on certain Unum US individual disability policies, including limited claims-development risk.
- Capital returns: The company repurchased 11.9 million shares for approximately $403 million and paid $182.6 million in common dividends. The annualized dividend increased 8.1% during 2016.
Debt, liquidity, and capital
Unum issued $600 million of senior notes in 2016: $350 million of 3.00% notes due 2021 and $250 million of 5.75% notes due 2042. It repaid $350 million of 7.125% notes at maturity. Total debt was $2,999.4 million at year-end, including $2,999.4 million of long-term debt and no short-term debt.
The company had a $400 million unsecured revolving credit facility, extendable to $600 million, maturing in March 2021. No borrowings were outstanding at year-end; $2.1 million of letters of credit had been issued. Unum Group and its intermediate holding companies held $594 million of cash, short-term investments, and fixed maturity securities, excluding amounts committed for subsidiary contributions.
The weighted-average RBC ratio for traditional U.S. insurance subsidiaries was above 400%. Approximately $859 million was available for ordinary dividends from traditional U.S. insurance subsidiaries during 2017 without prior regulatory approval, subject to applicable requirements. The filing states that domestic resources were sufficient for expected liquidity needs over the following 12 months.
Outlook, risks, contingencies, and unusual items
Management expected continued premium growth in core businesses during 2017, strong persistency, generally stable benefits experience, expense discipline, and further operating-efficiency gains. Management also expected continued capital flexibility and shareholder returns.
- Low interest rates continued to pressure investment yields, operating margins, pension costs, and reserve adequacy. A 25-basis-point change in the assumed long-term-care discount rate was estimated to affect reserves by approximately $450 million.
- Management expected generally stable 2017 group disability and Colonial Life benefit ratios, but adverse economic conditions could increase claim incidence or reduce recoveries.
- The U.K. vote to leave the European Union could dampen U.K. growth, create investment and solvency-ratio volatility, and cause unfavorable foreign-currency translation.
- Long-term-care reserves and claims remain sensitive to morbidity, mortality, persistency, premium-rate approvals, discount rates, and claim resolution. The filing identifies potential reserve impacts of approximately $220 million for Unum US group long-term disability and $237 million for Closed Block individual disability under modeled assumption variations.
- 2016 included $24.2 million of net realized investment gains, including $30.5 million of other-than-temporary impairment losses and a $40.9 million gain related to an embedded derivative. These items affect GAAP earnings but are excluded from operating income.
- The company reported $41.5 billion of reserves for future policy and contract benefits and $7.1 billion of ceded reserves. Reinsurer insolvency or nonperformance could increase the company’s obligations.
- Pending litigation and regulatory matters include claims-handling disputes, unclaimed-property examinations, and other insurance-related proceedings. Management believes the ultimate outcome should not materially affect financial position, but an adverse result could materially affect a particular period’s earnings or cash flows.
- The company had $314.0 million of unfunded investment commitments and $189.6 million of future operating lease payments.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Starmount was excluded from management’s internal-control assessment because it was acquired during 2016.
Important facts for investors to verify
- Reconcile GAAP net income of $931.4 million with after-tax operating income of $926.2 million and assess the sustainability of realized investment gains and losses.
- Track the effect of prolonged low interest rates on net investment income, reserve discount rates, long-term-care adequacy, pension obligations, and future margins.
- Review Closed Block long-term-care claims experience, approved rate increases, policyholder elections, and reserve sensitivity.
- Assess whether the Starmount acquisition produces the expected dental and vision growth and integration benefits.
- Monitor U.K. operating results on a constant-currency basis and the impact of Brexit-related economic and regulatory developments.
- Confirm subsidiary dividend capacity, RBC ratios, rating-agency actions, and the parent company’s liquidity after share repurchases, dividends, acquisitions, and debt service.
- Review reinsurance recoverables, captive reinsurance arrangements, counterparty quality, and the company’s retained exposure if reinsurance is unavailable or uncollectible.
- Evaluate the maturity profile and cost of the company’s debt, including $200 million due in 2018, $400 million in 2020, and $350 million in 2021.